Options Show China IPO Risk in U.S. Tops American Offerings

Options traders are less bullish about Chinese companies that listed stock in the U.S. last year than American corporations with initial public offerings amid concern the Asian economy will slow.

There were 1.38 outstanding calls to buy for each put to sell for eight Chinese companies with options open interest exceeding 1,500 contracts as of yesterday, compared with 1.69 for 22 U.S. shares meeting the same criteria, according to data compiled by Bloomberg.

Central banks in emerging economies from China to Russia are raising interest rates and lifting bank reserve requirements to fight inflation as anti-government protests in the Middle East and northern Africa drive up fuel costs. The greater put-option levels for Chinese companies show investors may be protecting their holdings, said Josef Schuster, the Chicago-based founder of IPOX Capital Management LLC, which oversees about $2.5 billion and has an index tracking Asian IPOs.

“The put-to-call ratio indicates more bearishness for Chinese IPOs,” Schuster said in a telephone interview. “Funds or institutions or retail with more emerging markets exposure want to hedge their risk to the downside.”

The Chinese companies were more volatile on their first day of trading and have posted worse returns, Bloomberg data show. While last year’s best-performing Chinese IPO rose up to 161 percent on its first day of trading, the worst performer tumbled as much as 26 percent. That compares with a 55 percent gain and 12 percent drop for the best and worst U.S. corporations. The median gain for the U.S. companies was 22 percent through March 2, and the Chinese companies fell a median 2.3 percent.

Implied Volatility

Investors are paying higher prices for options on the Chinese IPOs, signaling higher risk. Implied volatility, the key gauge of prices, for at-the-money options expiring in 30 days was a median of 64.86 for the Chinese stocks versus 44.36 for the American shares.

China Lodging Group Ltd., the Shanghai-based operator of a hotel chain in China, had a call-to-put ratio of 0.64-to-1 yesterday. The company, which raised $110 million in March 2010, gained 14 percent on its first day of trading and has risen a total of 55 percent. It slipped 4.6 percent to $18.12 today.

The call-to-put ratio for Beijing-based Youku.com Inc., the largest online video website in China, is 1.06-to-1. The company rallied 161 percent in December for the biggest first-day gain in the U.S. since 2005, when Baidu Inc. of Beijing quadrupled after its IPO. Youku.com sold $203 million of shares, 20 percent more than initially sought, after pricing its IPO above the forecast price range. The company has more than tripled since its offering and gained 1 percent to $42.93 today.

E-Commerce China

E-Commerce China Dangdang Inc.’s call-to-put ratio was 1.43-to-1 yesterday. China’s largest book retailer, which has the most options open interest among the Chinese IPOs, in December raised $272 million -- 6.7 percent more than initially sought -- after pricing its American depositary receipts above the forecast price range. Beijing-based Dangdang gained 87 percent on its first trading day and has advanced 69 percent since the offering. It rallied 1.4 percent to $27.40.

Chinese companies that had a U.S. IPO last year raised a total of $3.79 billion, more than in 2009 and 2008 combined, excluding the exercise of the overallotment option. U.S. companies sold $32.5 billion of shares. A total of 41 Chinese companies completed an IPO in the U.S. last year, more than in any year since at least 1990, Bloomberg data show.

‘Very, Very Hot’

“The Chinese market, particularly the IPO market was very, very hot,” said Timothy Cunningham, a manager at Santa Fe, New Mexico-based Thornburg Investment Management, which oversees more than $78 billion. “At that point, you weren’t seeing the cracks in China’s economy, you weren’t having inflation concerns. There was just this really good long-term story that you could point to. Everybody wanted a piece of that growth.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, rose 3.4 percent this year through yesterday. It lagged behind the 5.8 percent gain for the Standard & Poor’s 500 Index and the 5.6 percent advance for the MSCI World Index of shares in 24 developed nations.

The U.S. economy will grow 3.2 percent in 2011, the fastest gross domestic product expansion since 2004, according to the median economist estimate in a Bloomberg survey. That’s slower than the 9.5 percent projection for China.

Growth rates in China remain “extraordinarily high in terms of the relative growth rates to any place else,” said Scott Billeadeau, who helps oversee about $19 billion at Fifth Third Asset Management in Minneapolis. “That’s going to create opportunities in the marketplace for rapidly growing companies.”

2011 IPOs

Five of the 28 companies that have completed U.S. IPOs this year are from China, data compiled by Bloomberg show. They raised a combined $148 million, excluding the exercise of the overallotment option.

“The market had been very, very adverse to accepting the good news out of China, always looking for the last several quarters at what could go wrong,” said Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. “In the case of China, it’s only a matter of time, along with Taiwan, before investors come back to realize that this thing has been working and will continue to work.”

The Chinese companies that listed their shares in the U.S. this year had a median first-day gain of 0.6 percent and lost a median of 3.2 percent through March 2. U.S. companies that completed an offering this year climbed a median of 3.6 percent on their first day of trading and advanced 3.5 percent through March 2.

Reserve Requirements

China’s central bank has boosted banks’ reserve requirement ratio eight times since the start of 2010, while raising interest rates three times to rein in inflation that reached 4.9 percent in January, near the 28-month high of 5.1 percent in November. The central bank raised its one-year deposit rate by a quarter of a percentage point to 3 percent last month.

“We’re aiming at some point for a massive correction because they’re going to have to raise interest rates,” Patrick Legland, global head of research and strategy at Societe Generale SA, said during an interview at Bloomberg’s headquarters in New York yesterday. “In the long term, China remains fast-growing. There is far too much risk short-term.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE